Zibo, China. The city of Zibo, China's ceramics capital, is undergoing environmental shock therapy to clear its filthy skies and transform its economy - and not everyone is happy.

Much of Zibo's sprawling industrial district has become a ghost town of shuttered factories, empty showrooms and abandoned restaurants after a clean-up campaign that began last year intensified this winter. Dozens of chimneys stand inactive.

"There used to be a lot of workers here but now they are demolishing the entire place," said a caretaker who gave his surname as Wei, pointing at the deserted warehouse of an abandoned factory he was guarding. "We have no idea what they will build here - that's the boss's decision."

Zibo, home to 4.5 million people about 260 miles south of Beijing in Shandong province, is one of 28 northern Chinese cities targeted in an unprecedented six-month anti-pollution blitz as China scrambles to meet air quality targets.

The city is also at the heart of a wider, long-term government effort to upgrade China's heavy industrial economy.

Once responsible for about a quarter of China's ceramic output, mainly floor and wall tiles, Zibo has slashed capacity by 70 percent and shut more than 150 companies and 250 production lines as part of a ruthless war on pollution.

Surviving plants have rushed to comply with tough new standards, but business is still threatened by constant production suspensions ordered by the government, as well as natural gas shortages this winter as northern cities switch to the fuel from coal.

"It is a brave step that China is taking, but they have to take it," said Alex Koszo, the founder of Vecor, a Hong Kong-based company that has built a joint-venture plant in Zibo to manufacture environmentally-friendly tiles from fly ash.

"They have the will, the money, and access to technology, so I think we are looking at a very different Zibo, and a very different Shandong, in five to ten years time."

The local environmental bureau declined to be interviewed, telling Reuters that clean-up efforts were "still at an early stage" - but changes are already conspicuous.

With old factories marked for demolition, new apartment blocks, shopping complexes and roads are being built. The city registered growth of 7.8 percent in the first three quarters of this year, driven by the service sector, according to the local government. Displaced workers have shifted to construction sites and other industries like textiles, residents said.

Zibo has also established a "greentech" incubator in the old district and opened a new high-tech industrial park in order to attract companies and encourage innovation in ceramics.

But some local businessmen accuse Beijing of running roughshod over local industry and paying too little heed to circumstances on the ground, with one boss accusing inspectors of behaving like "imperial envoys."

"There is a ring of 28 cities and pollution only needs to appear in Beijing - even just medium-level pollution - and all our factories have to shut," said the owner of a large local factory who declined to be named, fearing repercussions. "It doesn't matter whether you meet the standards or not, you have to shut."

Upgrades

Over the past decade, Zibo's ceramics makers took advantage of closures elsewhere to drive up output and seize market share in China. Zibo's tiles were used throughout China and exported around the world. In recent years, however, the industry was weighed down by poor quality and chronic overcapacity that eroded prices and exposed the sector to European Union anti-dumping measures.

Beijing's war on pollution served as an opportunity to tackle those problems. Now, the mainstay of the local economy is a shadow of its former self.

With annual production capacity slashed to 246 million square meters, compared to 827 million square meters before the campaign began, the government hopes surviving manufacturers can upgrade and compete with higher-end producers.

"I think the steps the government are taking now will push the costs up, and therefore the price of the goods will be up and the quality will meet international standards," said Koszo.

But the local factory owner said the campaign has inflicted long-term damage, eroding cost advantages and driving customers away.

"If Zibo was the only place producing tiles in the whole country, then it wouldn't be a problem. But this is an unfair policy: they are closing us but not others," he said.

Stop-Start

Environmental officials deny the pollution crackdown or the heightened vigilance of inspectors will cause deep harm to China's economy, saying any losses would be compensated by the long-term benefits of clean investment.

But in Zibo, even environmentally compliant manufacturers are losing customers. The factory owner said he has lost 80 percent of domestic clients and half his overseas ones, with many frustrated by the stop-start nature of production.

Zibo's ceramics companies are not only hit by emergency closures aimed at curbing smog. A year ago, they were ordered to switch from coal to gas, but suppliers are giving priority to residential winter heating.

"People are losing patience and manufacturing is shifting to the south," said Bryan Vadas, director at the Tile Agencies Group in Australia, which used to source products for export from Zibo but has now started buying elsewhere.

Environment Minister Li Ganjie said this year that China would not adopt an "indiscriminate one-size-fits-all approach", adding that companies have plenty of leeway to clean up and survive.

"Only enterprises that have no clear survival value, pollute heavily and have no hope of being rectified will be shut down," Li said.

But local enterprises have struggled to cope with repeated policy changes, with industry entry requirements adjusted four times in less than two years, the local factory owner said.

"I have worked hard to build up this business," he said. "Personally, I just think the government should tell us directly that they don't want us to stay in operation.